How Long Will the Energy Sector’s Struggles Last?

One of the largest upheavals in financial markets during the past year has been the plunge in the price of oil. The price of West Texas Intermediate crude oil (one of the main gauges of “the oil price”) has fallen from over $100 per barrel in July 2014 to around $45 per barrel. This decline has decimated the energy sector, which has lost almost 30% of its value over the past year while the overall US stock market has gained more than 10%. Is the energy sector’s underperformance a short-term aberration or part of a longer-term trend?

Another part of that answer depends on whether energy companies can adapt to lower oil prices by reducing their costs, for example by decreasing the size of their workforces and investing less in new exploration. By some estimates there have been almost 200,000 layoffs in the global oil industry since the middle of last year. The lower supply resulting from these changes could help the oil price arrest its decline and at least partially restore energy companies’ profits.

But low oil prices probably don’t explain all of the losses for energy stocks. In fact, the sector’s 40% underperformance compared to the broader stock market during the past year is far more extreme than during other recent oil price declines, even the 70% collapse in the oil price during the second half of 2008. It’s therefore likely that longer-term factors have contributed to the sector’s recent struggles as well.